Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

It is a good idea to be wary when a non-IT company gets rebranded -- either by itself or an exuberant investor -- as a 'tech' company.

However, it is intriguing when a company you don't associate with technology demonstrates a real affinity for it that shows up in good results. Enter EOG Resources Inc.

EOG, which reported results late Monday, remains an oil and gas exploration and production company. Yet on Tuesday morning's call, it took the unusual step of having Sandeep Bhakhri, its chief information and technology officer, provide a potted history of EOG's development of proprietary software tools, dating back to the 1990s.

In the latest iteration, developed over the past two years, EOG has moved to real-time collection and mobile dissemination of data, to speed up analysis and decision-making in drilling and fracking -- something Bhakhri describes as "having a control room in your pocket."

A CTO isn't the first specialized executive position you generally associate with oil -- chief engineer, perhaps, or maybe head of exploration. But, as I wrote here, one of the characteristics of the U.S. shale boom has been the application of manufacturing techniques, sensors and software to make sense of complex geological formations such as the Permian basin, cut well costs and speed up production. This task has only become more urgent as oil prices have fallen, but has also become easier as the cost of technology has continued to decline.

Hence, EOG's all-in cash costs per barrel of oil equivalent of output have fallen by more than a fifth since 2013's peak, despite production being 11 percent higher. Guidance for this year implies further efficiency gains:

Logical Reduction
While non-income taxes have risen with pricing, guidance implies EOG's cash costs per barrel will continue to decline
Source: The company, Bloomberg Gadfly analysis
Note: Production and transportation costs include fees for gathering and processing. 'LTM' equals last 12 months as of March 2017. '2017 guidance" uses the mid-point of EOG's guidance range and assumes realized prices of $48 a barrel for oil, $20 a barrel for natural gas liquids, and $2.10 per million BTU for natural gas.

Overall, cash costs look set to come in at $13 and change per barrel of oil equivalent in 2017 at the mid-point of EOG's guidance , the lowest since 2010.

On Tuesday's call, CEO William Thomas said he expects EOG this year can grow production by 18 percent and still cover its investment budget and dividends even if oil averages only $47 a barrel, down from the $50 level he spoke of on February's call, and versus an average price so far this year of $51 and change.

There's good reason to believe him. In the first quarter, EOG's $898 million of cash from operations was less than $150 million short of covering capex and dividends; less than $100 million if you count proceeds from disposals (as the majors do). In fact, on a trailing four-quarter basis, EOG is already living within its means:

Freed Up
EOG is already generating positive free cash flow on a trailing basis
Source: Bloomberg
Note: Trailing four quarters. Free cash flow is cash from operations less capex. Adjusted free cash flow is free cash flow plus proceeds from disposals less dividends paid.

Thomas was asked on Tuesday's call why EOG is raising production so aggressively with oil prices so low -- in other words, why not wait until prices go up in order to realize better returns from each well? There's a self-fulfilling element in there, of course: If companies such as EOG throttle back, then the shale recovery undercutting OPEC's efforts to raise prices would slow.

Leaving aside the fact that E&P companies are valued chiefly for growth, the CEO's answer was essentially that EOG is making decent money off its barrels even at current prices, and besides, there's more where they came from:

So we feel like the economics of the wells even at low oil prices is extremely strong and the right call for the shareholders [is] to continue to reinvest in those. We also have a very strong confidence ... that we can replace that inventory much, much faster than we're drilling it.

EOG's focus on technology gives it an enviable edge. What the mature oil industry should bear in mind, though, is that, unlike geology, technology has a way of migrating quite quickly.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. For example, at least for now, Tesla Inc. may hail from Silicon Valley, but it makes its revenue chiefly by building large metal machines in which people drive around. This is an "automotive" business.

  2. I am assuming average realized prices of $48 and $20 a barrel for oil and natural gas liquids, respectively, and $2.10 per million BTU for natural gas.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net